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John D. Hirschfeld, executive vice president of U.S. Realty Advisors, LLC of New York, N.Y., explains how he and his team worked with a Fortune 100 company in the service sector that wanted to convert a 200,000 sq.-ft. (18,580-sq.-m.) real estate asset to 100-percent cash, as opposed to owning it, or getting a mortgage that would only produce about 70-percent to 75-percent cash. The company wanted to use the cash from the building sale for daily operations and to expand its business.
“The company also wanted to achieve occupancy costs below its long-term debt costs, below its cost of capital, and below real estate rents that it would pay to a developer if this were not a long-term net lease,” Hirschfeld says, noting that the client signed an initial lease term of 17 years, with renewal rights for another 20 years. “The company wanted to match a long-term asset with a long-term fixed rate liability. A final objective in choosing the sale/leaseback model was to offload the real estate downside risk because it can walk away at the end of the lease if it chooses to.”
U.S. Realty Advisors, which has been in the business for over 15 years, has a solid reputation for closing deals. In fact, this contract had originally been awarded to another real estate services firm, which failed to close. U.S. Realty Advisors acquires and sells net leased real estate throughout the United States on behalf of institutional clients. The firm offers long-term net leases that unlock the value of real estate assets and free up capital for unrestricted uses.
“We were ultimately awarded the transaction because of our closing track record and our credibility,” Hirschfeld remarks. “We are also particularly well-equipped to tailor our executions to the specific objectives of the companies to which we are leasing. Here, the company’s primary objective was a low occupancy cost, so they agreed to sign a longer-term lease of 17 years, on a property that they were already committed to. This enabled us to lower our rent constant even further and the client did not have to relinquish any flexibility.”
Real estate investment and advisory firms across the board agree that a basic motivation for entering into a sale/leaseback agreement is to monetize assets.
“In general, the motivation for doing a sale/leaseback is to monetize assets,” says Bruce MacDonald, president of Net Lease Capital Advisors in the Boston area. “Through sale/ leasebacks, companies can take assets off the balance sheet and create equity.”
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In addition, Mike Dorsch, executive vice president of Boston, MA-based iStar Financial notes, “Clients often look to sale/leaseback deals for liquidity. Cash is dear to a company, and most like to invest it in their core business interests and not in real estate, so they pull the capital out of real estate and re-deploy it into the needs of their business. If appropriately structured, this alternative source of capital will be an off-balance-sheet obligation.”
“We work with many clients who are looking to monetize assets, clean up balance sheets, and pay down debt,” concurs Marjorie Palace, a principal of CRIC Capital, LLC in Boston, Mass. “We recently completed a $12-million transaction with Penhall International, a large industrial company. We purchased from them 11 assets, enabling them to pay off debt. They chose CRIC because we were able to close on time with 100-percent cash and no financing contingencies.”
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Palace explains how the 11 Penhall International properties purchased by CRIC Capital are warehouse-type light industrial use buildings where Penhall houses much of the machinery it uses in its highway construction businesses. The assets are located in various states across the country including California, Colorado, Nevada, and Arizona.
CRIC Capital, LLC combines the pioneering net leasing professionals of Boston-based Corporate Realty Investment Company, LLC with Prudential Real Estate Investors. CRIC Capital, as a principal investor, purchases real estate from and leases it back to investment-grade and select below-investment-grade companies through a variety of customized net leases.
“Sale/Leaseback deals are an efficient way for a company to use someone else’s capital to fund the expansion of new sites or pay off debt. This type of transaction allows corporations to strengthen their financial positions and free up capital to reinvest in their core business,” Palace concludes.